BROWSE

Wash Sale

Definition

A wash sale is a sale of a security at a loss and repurchase of the same or substantially identical security shortly before or after. Wash sale regulations protect against an investor who holds an unrealized loss and wishes to make it claimable as a tax deduction within the current tax year. The security is then repurchased in the hope that it will recover its previous value, which would only become taxable in some future tax year. A wash sale can take place at any time during the year. In the UK, a similar practice which specifically takes place at the end of a calendar year is known as bed and breakfasting. In a bed-and-breakfasting transaction, a position is sold on the last trading day of the year to establish a tax loss. The same position is then repurchased early on the first session of the new trading year, to restore the position. The term, therefore, derives its name from the late sale and early morning repurchase.

What is a 'Wash Sale'

A wash sale is a transaction where an investor sells a losing security to claim a capital loss, only to repurchase it again for a bargain. Wash sales are a method investors employ to try and recognize a tax loss without actually changing their position.

Explaining 'Wash Sale'

The effectiveness of this strategy has been greatly diminished with the implementation of the IRS 30-day wash rule, where a taxpayer cannot recognize a loss on an investment if that investment was purchased within 30 days of sale (before or after sale).


Further Reading


Optimal portfolio choice with wash sale constraints
www.sciencedirect.com [PDF]
… leaves no loopholes open for the investor and allows us to isolate the economic effects caused by … can only receive a tax rebate payment by changing his portfolio composition and sell part of … In order to isolate the impact of wash sale constraints we first assume that the menu of …

New twists on an old plot: investors look to avoid the wash sale rule by harvesting tax losses with exchange-traded fundsNew twists on an old plot: investors look to avoid the wash sale rule by harvesting tax losses with exchange-traded funds
heinonline.org [PDF]
… leaves no loopholes open for the investor and allows us to isolate the economic effects caused by … can only receive a tax rebate payment by changing his portfolio composition and sell part of … In order to isolate the impact of wash sale constraints we first assume that the menu of …

Tax-loss trading and wash salesTax-loss trading and wash sales
www.sciencedirect.com [PDF]
… leaves no loopholes open for the investor and allows us to isolate the economic effects caused by … can only receive a tax rebate payment by changing his portfolio composition and sell part of … In order to isolate the impact of wash sale constraints we first assume that the menu of …

Part IVA and Wash Sale Arrangements-Will It All Become Clear in the WashPart IVA and Wash Sale Arrangements-Will It All Become Clear in the Wash
heinonline.org [PDF]
… leaves no loopholes open for the investor and allows us to isolate the economic effects caused by … can only receive a tax rebate payment by changing his portfolio composition and sell part of … In order to isolate the impact of wash sale constraints we first assume that the menu of …

A stock index mutual fund without net capital gains realizationsA stock index mutual fund without net capital gains realizations
www.nber.org [PDF]
… leaves no loopholes open for the investor and allows us to isolate the economic effects caused by … can only receive a tax rebate payment by changing his portfolio composition and sell part of … In order to isolate the impact of wash sale constraints we first assume that the menu of …

Wash sale-type transactionsWash sale-type transactions
search.informit.com.au [PDF]
… leaves no loopholes open for the investor and allows us to isolate the economic effects caused by … can only receive a tax rebate payment by changing his portfolio composition and sell part of … In order to isolate the impact of wash sale constraints we first assume that the menu of …

Portfolio investment with the exact tax basis via nonlinear programmingPortfolio investment with the exact tax basis via nonlinear programming
pubsonline.informs.org [PDF]
… leaves no loopholes open for the investor and allows us to isolate the economic effects caused by … can only receive a tax rebate payment by changing his portfolio composition and sell part of … In order to isolate the impact of wash sale constraints we first assume that the menu of …

Trends in park tourism: Economics, finance and managementTrends in park tourism: Economics, finance and management
www.tandfonline.com [PDF]
… leaves no loopholes open for the investor and allows us to isolate the economic effects caused by … can only receive a tax rebate payment by changing his portfolio composition and sell part of … In order to isolate the impact of wash sale constraints we first assume that the menu of …



Q&A About Wash Sale


How does the 3-day wash rule affect investors?

The 3-day wash rule greatly diminishes the effectiveness of this strategy.

What does "tax loss" mean in this context?

Tax loss refers to the difference between what you paid for an investment and its current value.

What is not allowed under the IRS rules?

An investor cannot recognize any losses on investments that were purchased within three days before or after selling them.